Investment Banking

Valuation, Leveraged Buyouts,

and Mergers & Acquisitions
DCF Analysis - Completed

JOSHUA ROSENBAUM
JOSHUA PEARL

ValueCo Corporation
Discounted Cash Flow Analysis
($ in millions, fiscal year ending December 31)
Operating Scenario
1
Mid-Year Convention
Y

Operating Scenario

2005
$780.0
NA
471.9
$308.1
39.5%
198.9
$109.2
14.0%
15.6
$93.6
12.0%
35.6
$58.0

Sales
% growth
COGS
Gross Profit
% margin
SG&A
EBITDA
% margin
Depreciation & Amortization
EBIT
% margin
Taxes
EBIAT
Plus: Depreciation & Amortization
Less: Capital Expenditures
Less: Increase in Net Working Capital

15.6
(15.0)

Unlevered Free Cash Flow

WACC
Discount Period
Discount Factor
Present Value of Free Cash Flow

Historical Period
2006
$850.0
9.0%
512.1
$337.9
39.8%
214.6
$123.3
14.5%
17.0
$106.3
12.5%
40.4
$65.9
17.0
(18.0)

9.6%

12.7%

13.3%

13.3%

18.5
(18.5)

Projection Period
2008
$1,000.0
8.1%
600.0
$400.0
40.0%
250.0
$150.0
15.0%
20.0
$130.0
13.0%
49.4
$80.6

2009
$1,080.0
8.0%
648.0
$432.0
40.0%
270.0
$162.0
15.0%
21.6
$140.4
13.0%
53.4
$87.0

2010
$1,144.8
6.0%
686.9
$457.9
40.0%
286.2
$171.7
15.0%
22.9
$148.8
13.0%
56.6
$92.3

2011
$1,190.6
4.0%
714.4
$476.2
40.0%
297.6
$178.6
15.0%
23.8
$154.8
13.0%
58.8
$96.0

2012
$1,226.3
3.0%
735.8
$490.5
40.0%
306.6
$183.9
15.0%
24.5
$159.4
13.0%
60.6
$98.8

2013
$1,263.1
3.0%
757.9
$505.2
40.0%
315.8
$189.5
15.0%
25.3
$164.2
13.0%
62.4
$101.8

20.0
(20.0)

21.6
(21.6)
(8.0)

22.9
(22.9)
(6.5)

23.8
(23.8)
(4.6)

24.5
(24.5)
(3.6)

25.3
(25.3)
(3.7)

$79.0

$85.8

$91.4

$95.3

$98.1

0.5
0.95
$75.0

1.5
0.86
$73.4

2.5
0.77
$70.4

3.5
0.69
$66.1

4.5
0.63
$61.4

Implied Equity Value and Share Price

Terminal Year EBITDA (2013E)

Exit Multiple
Terminal Value
Discount Factor
Present Value of Terminal Value
% of Enterprise Value

$189.5
7.0x
$1,326.3
0.59
$787.1
69.4%

Enterprise Value

$1,133.3

6.0x
1,060
1,040
1,021
1,002
984

Enterprise Value
Exit Multiple
6.5x
7.0x
1,119
1,177
1,098
1,155
1,077
$1,133
1,057
1,112
1,038
1,091

Enterprise Value
Less: Total Debt
Less: Preferred Securities
Less: Noncontrolling Interest
Plus: Cash and Cash Equivalents
Implied Equity Value

CAGR
('08 - '13)
4.8%

4.8%

4.8%

4.8%

4.8%

8.0x
1,295
1,270
1,246
1,222
1,199

Implied EV/EBITDA

$17.17

0.0
10.0%
10.5%
11.0%
11.5%
12.0%

3.0%

Enterprise Value
LTM 9/30/2008 EBITDA

50.0

Implied Share Price

$98.1
11.0%
$1,326.3

Implied Perpetuity Growth Rate

$858.3

Implied Share Price

7.5x
1,236
1,213
1,190
1,167
1,145

Implied Perpetuity Growth Rate

Terminal Year Free Cash Flow (2013E)
WACC
Terminal Value

$1,133.3
(300.0)
25.0

WACC

$346.3

Terminal Value

WACC

CAGR
('05 - '07)
8.9%

11.0%

Enterprise Value
Cumulative Present Value of FCF

1,133.3
10.0%
10.5%
11.0%
11.5%
12.0%

2007
$925.0
8.8%
555.0
$370.0
40.0%
231.3
$138.8
15.0%
18.5
$120.3
13.0%
45.7
$74.6

Base

$1,133.3
146.7

Implied EV/EBITDA

6.0x
0.9%
1.3%
1.7%
2.2%
2.6%

Implied Perpetuity Growth Rate

Exit Multiple
6.5x
7.0x
1.5%
2.1%
2.0%
2.5%
2.4%
3.0%
2.8%
3.4%
3.3%
3.9%

7.7x

7.5x
2.6%
3.0%
3.5%
3.9%
4.4%

8.0x
3.0%
3.5%
3.9%
4.4%
4.8%

ValueCo Corporation
Sensitivity Analysis

17.2
10.0%
10.5%
11.0%
11.5%
12.0%

0.0
10.0%
10.5%
11.0%
11.5%
12.0%

6.0x
15.74
15.36
14.98
14.62
14.26

Implied Share Price

Exit Multiple
6.5x
7.0x
16.88
18.02
16.47
17.59
16.08
$17.17
15.69
16.76
15.31
16.35

6.0x
0.9%
1.3%
1.7%
2.2%
2.6%

Implied Perpetuity Growth Rate

Exit Multiple
6.5x
7.0x
1.5%
2.1%
2.0%
2.5%
2.4%
3.0%
2.8%
3.4%
3.3%
3.9%

7.5x
1,236
1,213
1,190
1,167
1,145

7.5x
19.16
18.70
18.26
17.82
17.40

8.0x
1,295
1,270
1,246
1,222
1,199

8.0x
20.30
19.82
19.35
18.89
18.44

WACC

6.0x
1,060
1,040
1,021
1,002
984

WACC

1,133.3
10.0%
10.5%
11.0%
11.5%
12.0%

Enterprise Value
Exit Multiple
6.5x
7.0x
1,119
1,177
1,098
1,155
1,077
$1,133
1,057
1,112
1,038
1,091

858.3
10.0%
10.5%
11.0%
11.5%
12.0%

0.7
10.0%
10.5%
11.0%
11.5%
12.0%

6.0x
785
765
746
727
709

Implied Equity Value

Exit Multiple
6.5x
7.0x
844
902
823
880
802
$858
782
837
763
816

7.5x
961
938
915
892
870

PV of Terminal Value as % of Enterprise Value

Exit Multiple
6.0x
6.5x
7.0x
7.5x
66.6%
68.4%
69.9%
71.4%
66.3%
68.1%
69.7%
71.1%
66.1%
67.9%
69.4%
70.9%
65.8%
67.6%
69.2%
70.6%
65.6%
67.3%
68.9%
70.4%

8.0x
1,020
995
971
947
924

8.0x
72.7%
72.4%
72.2%
72.0%
71.7%

Implied Enterprise Value / LTM EBITDA

7.5x
2.6%
3.0%
3.5%
3.9%
4.4%

8.0x
3.0%
3.5%
3.9%
4.4%
4.8%

WACC

WACC

WACC

WACC

($ in millions)

7.7
10.0%
10.5%
11.0%
11.5%
12.0%

6.0x
7.2x
7.1x
7.0x
6.8x
6.7x

6.5x
7.6x
7.5x
7.3x
7.2x
7.1x

Exit Multiple
7.0x
8.0x
7.9x
7.7x
7.6x
7.4x

7.5x
8.4x
8.3x
8.1x
8.0x
7.8x

8.0x
8.8x
8.7x
8.5x
8.3x
8.2x

ValueCo Corporation
Working Capital Projections
($ in millions)

2005

Historical Period
2006

Projection Period
2007

2008

2009

2010

2011

2012

2013

Sales
Cost of Goods Sold

$780.0
471.9

$850.0
512.1

$925.0
555.0

$1,000.0
600.0

$1,080.0
648.0

$1,144.8
686.9

$1,190.6
714.4

$1,226.3
735.8

$1,263.1
757.9

Current Assets
Accounts Receivable
Inventories
Prepaid Expenses and Other
Total Current Assets

123.2
94.6
7.1
$224.9

141.1
104.0
8.5
$253.6

152.6
115.6
9.3
$277.5

165.0
125.0
10.0
$300.0

178.2
135.0
10.8
$324.0

188.9
143.1
11.4
$343.4

196.4
148.8
11.9
$357.2

202.3
153.3
12.3
$367.9

208.4
157.9
12.6
$378.9

Current Liabilities
Accounts Payable
Accrued Liabilities
Other Current Liabilities
Total Current Liabilities

65.2
69.9
15.6
$150.7

66.0
83.2
20.4
$169.6

69.4
92.5
23.1
$185.0

75.0
100.0
25.0
$200.0

81.0
108.0
27.0
$216.0

85.9
114.5
28.6
$229.0

89.3
119.1
29.8
$238.1

92.0
122.6
30.7
$245.3

94.7
126.3
31.6
$252.6

$74.2
9.5%

$84.0
9.9%

$92.5
10.0%

$100.0
10.0%

$108.0
10.0%

$114.5
10.0%

$119.1
10.0%

$122.6
10.0%

$126.3
10.0%

Net Working Capital

% sales
(Increase) / Decrease in NWC

($9.8)

($8.5)

($7.5)

($8.0)

($6.5)

($4.6)

($3.6)

($3.7)

Assumptions
Days Sales Outstanding
Days Inventory Held
Prepaids and Other CA (% of sales)

57.7
73.2
0.9%

60.6
74.1
1.0%

60.2
76.0
1.0%

60.2
76.0
1.0%

60.2
76.0
1.0%

60.2
76.0
1.0%

60.2
76.0
1.0%

60.2
76.0
1.0%

60.2
76.0
1.0%

Days Payable Outstanding

Accrued Liabilities (% of sales)
Other Current Liabilities (% of sales)

50.4
9.0%
2.0%

47.0
9.8%
2.4%

45.6
10.0%
2.5%

45.6
10.0%
2.5%

45.6
10.0%
2.5%

45.6
10.0%
2.5%

45.6
10.0%
2.5%

45.6
10.0%
2.5%

45.6
10.0%
2.5%

ValueCo Corporation
Weighted Average Cost of Capital Analysis
($ in millions)

WACC Calculation

Comparable Companies Unlevered Beta

Capital Structure
Debt-to-Total Capitalization
Equity-to-Total Capitalization

30.0%
70.0%

Cost of Debt
Cost of Debt
Tax Rate
After-tax Cost of Debt

6.0%
38.0%
3.7%

Size Premium(3)
Cost of Equity

Mean
Median

Predicted
Levered Beta(4)
1.11
1.08
1.35
1.25
1.19

Market
Value of Debt
$575.0
515.0
715.0
550.0
250.0

Market
Value of Equity
$2,600.0
1,750.0
1,050.0
1,000.0
630.0

1.20
1.19

Debt/
Equity
22.1%
29.4%
68.1%
55.0%
39.7%

Marginal
Tax Rate
38.0%
38.0%
38.0%
38.0%
38.0%

Unlevered
Beta
0.98
0.91
0.95
0.93
0.96
0.95
0.95

42.9%
39.7%

ValueCo Relevered Beta

Cost of Equity
Risk-free Rate(1)
Market Risk Premium(2)
Levered Beta

Company
Adler Industries
Lanzarone International
Lajoux Global
Momper Corp.
McMenamin & Co.

4.0%
7.1%
1.20
1.65%
14.1%

Mean
Unlevered
Beta
Relevered Beta

0.95

Target
Debt/
Equity
42.9%

Target
Marginal
Tax Rate

Relevered
Beta

38.0%

1.20

WACC Sensitivity Analysis

11.0%

(1) Interpolated yield on 20-year U.S. Treasury

(2) Obtained from Ibbotson SBBI Valuation Yearbook
(3) Low-Cap Decile size premium based on market capitalization, per Ibbotson
(4) Sourced from Barra

Debt-to-Total
Capitalization

Pre-tax Cost of Debt

WACC

0.1
10.0%
20.0%
30.0%
40.0%
50.0%

5.0%
11.9%
11.3%
10.8%
10.3%
9.8%

5.5%
11.9%
11.4%
10.9%
10.4%
10.0%

6.0%
11.9%
11.5%
11.0%
10.6%
10.1%

6.5%
11.9%
11.5%
11.1%
10.7%
10.3%

7.0%
12.0%
11.6%
11.2%
10.8%
10.4%

Assumptions Page 1 - Income Statement and Cash Flow Statement

Year 1
2009

Year 2
2010

Year 3
2011

Year 4
2012

Projection Period
Year 5
Year 6
2013
2014

Year 7
2015

Year 8
2016

Year 9
2017

Year 10
2018

Income Statement Assumptions

Sales (% growth)
Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

8.0%
8.0%
10.0%
12.0%
5.0%
2.0%

6.0%
6.0%
8.0%
10.0%
4.0%
2.0%

4.0%
4.0%
6.0%
8.0%
3.0%
2.0%

3.0%
3.0%
4.0%
6.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

Cost of Goods Sold (% sales)

Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

SG&A (% sales)
Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

25.0%
25.0%
25.0%
24.0%
26.0%
27.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

Depreciation & Amortization (% sales)

Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

Cash Flow Statement Assumptions

Capital Expenditures (% of sales)
Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

Assumptions Page 2 - Balance Sheet

Year 1
2009

Year 2
2010

Year 3
2011

Year 4
2012

Projection Period
Year 5
Year 6
2013
2014

Year 7
2015

Year 8
2016

Year 9
2017

Year 10
2018

Current Assets
Days Sales Outstanding (DSO)
Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

Days Inventory Held (DIH)

Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

Prepaid and Other Current Assets (% of sales)

Base
1
Management
2
Upside
3
Downside 1
4
Downside 2
5

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

Current Liabilities
Days Payable Outstanding (DPO)
Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

Accrued Liabilities (% of sales)

Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

Other Current Liabilities (% of sales)

Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

Copyright 2009 by Joshua Rosenbaum and Joshua Pearl. All rights reserved.
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Library of Congress Cataloging-in-Publication Data:

ISBN-13 978-0-470-44220-3
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1